2007 REGISTRATION DOCUMENT

CONSOLIDATED FINANCIAL STATEMENTS5Notes to the financial s tatements p repared in accordance with I nternational Financial Reporting S tandards as adopted by the European Union< Contents >In addition to the effects related directly to the financing of the subprimemortgage market in the United States, investors started turning theirbacks on assets created through a securitisation process and there wasalso a fall in demand for credit instruments. This led to a broadbasedincrease in the premiums expected by investors to cover the risk fromnon-sovereign issuers. With spreads becoming too expensive for certainissuers, the long-term fixed income market contracted sharply, whilestructured products with a concentrated issuer risk fell in value.The discount on debt products affected debt syndications that werein the process of being arranged when the crisis erupted. In particular,banks that were lead-managing leveraged buy-outs experienced a fallin value of the instruments they were planning to sell to other banks,due to the sharp deterioration in market conditions since they madetheir initial commitment to the borrower.The liquidity crisis triggered by the risk-averse climate also affected therollover of short-term issues by securitisation conduits. Certain banksthat manage their own conduits had to provide replacement financing,thereby increasing their own positions in the asset classes held by theconduits.Lastly, the money market funds significantly reduced their investmentsin short-term assets and focused on overnight investments. This createdan imbalance on the money markets and an unusually broad spreadbetween overnight rates and short-term rates, leading to an increasein banks’ financing costs.4.f.2Review of BNP P aribas p ositionse xposed to the e ffects of t he c risisIn this environment, BNP Paribas’ management gave the risk surveillanceand financial control teams the task of identifying all of the Bank’spositions that may be affected by the crisis and reviewing the methodsand parameters used to value these positions. The identified risks at31 December 2007 are described below.Exposure to subprime risksWithin Corporate and Investment Banking, the net positions of thecapital markets business lines on products exposed to subprime riskare very limited. The small position in subprime Residential MortgageBacked Securities (RMBSs) is offset by purchased protection consistingof subprime Collateralized Debt Obligations (CDOs).The counterparty risk on the subprime protection for a nominal amountof approximately EUR 3 billion purchased from monoline insurersamounted to EUR 1,089 million at 31 December 2007, net of purchasedprotection amounting to EUR 245 million against monoline default. Therisk is covered by a EUR 388 million credit adjustment, reflecting the CDSmarket’s most conservative assessment of the monoline insurers as ofthe approval date of the Group’s consolidated financial statements. Inaddition, credit adjustments totalling EUR 80 million have been recordedin respect of counterparty risks on purchased protection for nonsubprimeassets obtained from the monolines. In all, credit adjustmentson monoline counterparties totalled EUR 468 million.Following the credit adjustment, at 31 December 2007 the Bank hadno residual position with the only monoline insurer in default at thatdate.BancWest’s mortgage loan policy consists of lending essentially to primeand superprime borrowers, with subprime borrowers representing just1% of the mortgage loan book. Including the risks in the investmentportfolio, after provisions for impairment, BancWest’s net exposure tosubprime risks is limited to around EUR 300 million.Exposure on leveraged buyouts in progressThe Bank’s gross exposure at 31 December 2007 was approximatelyEUR 2,500 million. Negative fair value adjustments of EUR 238 millionwere recorded in the second half.Exposure on sponsored conduitsBNP Paribas manages six securitisation conduits on behalf of clients,representing total assets of some EUR 11,000 million. These assets,which are presented in note 6.c, are relatively low risk. They includesome EUR 4,200 million in US assets, including around EUR 200 millionin mortgage-backed assets of which the subprime portion is notmaterial.These conduits have not been consolidated since they do not meet theconsolidation criteria set out in note 1.b.1 “Scope of consolidation”.Although the Group provided liquidity assistance to some of theseconduits during certain periods (debt securities issued by these conduitsand provisionally carried in the Group’s balance sheet representedEUR 4,095 million at 31 December 2007), the analysis of criteriademonstrating the absence of control by the Group has not beensubstantially modified.12345678910112007 Registration document - BNP PARIBAS 151